Technically Speaking

Are My Eyes Deceiving Me?

Source: DTN ProphetX

The subject of the usefulness of technical analysis is a work in process for an upcoming On the Market column. But as I look at the weekly chart for the November soybean contract, questions about analytical methodologies abound. I know what I see when I look at this chart (as well as a number of others), but what I don't know is if it matters anymore.

Study the chart for a moment. Those of you familiar with my analysis will quickly see a number of patterns that have historically been used to show market direction over time - trend. Let me walk through them:

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Trend - If we go back to the low of $11.86 1/2 from the week of April 22, 2013, and connect the subsequent lows through this past week's low of $12.25 (diagonal green line) we have a clear pattern of higher lows. On the other hand, connecting the highs dating back to the week of September 10, 2012, we see generally lower highs, indicating a longer-term consolidation pattern within a wide range. However, if we add in weekly stochastics (second study) we see that the last major crossover was bullish. This means the faster moving blue line crossed above the slower moving red line below the oversold level of 20%. You'll notice this occurred the week of April 22, in conjunction with the contract establishing its previously mentioned low. The combination of these chart indicators would signal that the secondary (intermediate-term) trend had turned up, implying renewed buying interest from noncommercial (investment, fund, etc.) traders. The weekly CFTC Commitments of Traders report noncommercial net-futures position (blue histogram, third study) would confirm this. This group's position hit a low of 61,957 contracts the week of May 6, and has since grown to the latest report number of 104,371 contracts. And with market volatility of the November contract still relatively low at 12.7% (red line, fourth study), the November soybean contract should continue to see noncommercial buying interest. One last thing on trend; note that this past week's range took out the high and low of the previous week before the contract slowed higher for the week. This is a classic bullish outside week indicating the uptrend should strengthen.

Fundamentals - Besides volatility, another key factor that has historically swayed noncommercial opinion is a market's supply and demand situation. From a technical point of view, as most of you know, we can gauge fundamentals by looking at futures spreads, or the price difference between contracts of a particular commodity. In the case of new-crop soybeans, we use the November to January futures spread (bottom study, green line). Notice that it closed this past week at (-4.5) cents. This means there is a 4 1/2 cent carry in the spread, or that the January 2014 contract is priced 4 1/2 cents above the November 2013 contract. If we measure that against the full cost of holding soybeans in commercial storage for that time frame, we can determine that commercial traders (those involved in the cash trade of the underlying commodity) hold a bullish view of supply and demand. Also note that the trend in the spread (again, price direction over time) is up, with minor resistance at the recent high of a 3 cent carry. This implies that not only is the commercial outlook bullish, but growing slightly more bullish as time goes by.

So why does the general consensus seem to be so bearish in regards to soybeans? Why the 30-plus cent sell-off in the market this past Friday? From a technical point of view I could argue that the contract ran into solid resistance near $12.98 (this past week's high was $12.97) a price that marks the 50% retracement level of the downtrend from the high of $14.09 3/4 (September 2012) through the recent low of $11.86 1/2. The argument was also made that weather forecasts changed, though new-crop forward curve (series of futures spreads from the November 2013 through the August 2014 contracts) did not reflect an easing of concern by the commercial side of the market.

This coming week could be important for November soybeans. We'll see if technical signals still carry any weight in the market, or if other factors have emerged making chart analysis obsolete.

To track my thoughts on the markets throughout the day, follow me on Twitter: www.twitter.com\DarinNewsom

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Comments

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McFly
7/16/2013 | 10:40 AM CDT
beans in western Indiana look good with high yield potential FOR NOW!?! However,Indiana has never counted for much as far as the trade is concerned. From my eastern cornbelt viewpoint, Iowa is the state everybody watches, If their crop prospects are sub par , higher prices seem likely. Wish you better luck. Respectfully, McFly
Matt & Cindy Bauer
7/15/2013 | 7:34 AM CDT
drive around between carroll and ft. dodge and count how many beans have filled the rows. if the national av. is supposed to be 45 bu. somebody better have a lot of 60 bu. beans . a lot of beans are just getting going. they won't make 45 with perfect weather
DARIN NEWSOM
7/13/2013 | 11:33 AM CDT
Also, in regards to Friday's On the Market column, "It's That Time", a reader pointed out that "Sunday Morning Coming Down" was actuall a Kris Kristofferson song. To give credit where credit is due, he is correct. Kristofferson did pen the single. However, it was Johnny Cash who would go on to have the most success with it, and his version is the one that I was most familiar with. As always, thanks for the feedback.